5th Sep 2007 07:02
Kiln Ltd05 September 2007 Kiln Ltd Interim results for the six months ended 30 June 2007 Highlights Financial summary • Profit after tax of £17.2 million (2006: £16.3 million)• Profit before tax £20.8 million (2006: £24.3 million)• Earnings per share of 5.89p (2006: 5.59p)• Annualised return on equity 14% (2006: 15%)• Cross-cycle minimum dividend increased from 4p to 5p• Interim dividend 1.33p per share (2006: 1p per share) Operational summary • Gross written premium £241.3 million (2006: £230.8 million)• Net earned premium £129.0 million (2006: £121.2 million)• Rates very slightly reduced from last year (less than 2%)• Managed syndicates' combined ratio of 85% and claims ratio of 48% (2006: 86% and 49% respectively)• Investment income £11.0 million (2006: £8.7 million)• New corporate structure established and operating effectively Outlook • Committed to maintaining underwriting discipline through the cycle; planned capacity at Lloyd's £847 million for 2008 year of account, a reduction of 14%• Continued progress on establishing a presence for Kiln in the USA and developing distribution channels Commenting on these results, Kiln Group chief executive officer Edward Creasysaid: "Kiln has made good progress during the first six months of 2007. Our profitsafter tax are up 5% despite the costs of our redomiciliation to Bermuda.Although market conditions are becoming more challenging, rates in our portfoliohave remained stable, being less than 2% down on last year, and we expect fullyear premiums for 2007 to show a small increase on the 2006 equivalent. Althoughthis is somewhat below our initial expectations, we strongly believe that ourshareholders' interests are best served by maintaining our underwritingdiscipline, writing for profit rather than volume. For 2008 we are planning toreduce the capacity that we manage at Lloyd's by 14% to £847 million and tocontinue to focus on developing our distribution access and international reach." 5 September 2007 Enquiries: Kiln Ltd 020 7886 9000Edward CreasyKate Rogers College Hill 020 7457 2020Roddy WattTony Friend Group chairman's report Kiln has made significant strategic progress during the first six months of 2007and has delivered a solid set of results, with profit after tax of £17.2 million(2006: £16.3 million) and earnings per share of 5.89p (2006: 5.59p).Shareholders' equity has increased from £250.4 million in December 2006 to£259.5 million at 30 June 2007 (88.9p per share), and the annualised return onequity at the half year stands at 14% (2006: 15%). Kiln has achieved this levelof profit notwithstanding the considerable expenditure incurred in thesuccessful establishment of our new headquarters in Bermuda. We believe thatthis investment positions us well to benefit from the strategic initiatives thatwe are currently pursuing and represents the foundation on which Kiln candevelop as a global insurance and reinsurance group with growing internationalreach. As we have said at this juncture in previous years, the bulk of our exposure tocatastrophe-related risk occurs in the second half of the year, so the reportingof the first half is necessarily tempered in particular with the knowledge thatthe hurricane season is far from over. That notwithstanding, the underwritingperformance in the first half of 2007 has to date been similar to that of 2006,with attritional and large loss activity having been broadly in line withexpectations. Our investment strategy remains cautious, in line with our approach to capitalrisk management in general and, as we reported last month, our portfolio hasminimal exposure to the sub-prime market and contains no holdings ofcollateralised debt obligations (CDOs). The steady performance of the investmentportfolio for the first half of the year, with an annualised yield of 4.8%(2006: 3.2%), is showing signs of continuing in the third quarter,notwithstanding the turbulence in international investment markets. Dividend In the announcement of Kiln's 2006 full year results, we made a commitment toraise our annual dividend from 3p to 4p per share in recognition of the profitsgenerated in 2006 and the benefits the company believed would arise forshareholders from the redomiciliation to Bermuda. Now that these benefits arebeginning to be realised and as a result of improving free cash flows during thefirst half of the year - aided by strong underwriting conditions and monetaryreleases from Lloyd's - the board of Kiln Ltd has decided to increase furtherits annual dividend. Accordingly, for 2007 it is the intention that the annualdividend be increased to 5p per share (2006: 4p) and that it be maintained atthat level or above throughout the insurance cycle, subject to exceptionalcircumstances. In line with our policy announced in March - that the interim dividend willequate to one third of the previous year's total dividend - the amount payablefor this half year amounts to 1.33p per share (2006: 1p). The interim dividendwill be paid on 16 November 2007 to shareholders on the register on 19 October2007. The board The redomiciliation and restructuring of the group necessitated the formation ofa new board for the Bermuda-based listed holding company and I am delighted towelcome to the Kiln Ltd board two new directors who are resident in Bermuda,Elizabeth Murphy and John Wadson. Elizabeth brings extensive experience to theboard having held senior executive positions in a number of insurance companies;John Wadson is a similarly valuable addition to the board. He is the presidentand treasurer of three Bermuda-based companies, and has a wealth of experienceand contacts in the Bermudian business community. I look forward to the newperspectives that they will both bring to the company. Paul Wilson and DavidWoods have not joined the Kiln Ltd board although they continue to be involvedas non-executive directors of our subsidiary companies in London, and I wouldalso like to thank them for their contributions to Kiln plc over the years. The future Kiln has made considerable progress in the last 12 months and I see goodopportunities to come as we move forward with our stated strategic aims. Thecompany is now on a strong footing from which to benefit from its specialistunderwriting expertise and good work has been done to extend our underwritingreach internationally. It is the Kiln people who make this possible and Iconclude with my thanks to all of them for their invaluable contribution to thewell-being of Kiln. There are challenges ahead for us all, but our people andtheir commitment to our business mean that we remain well positioned to rewardour shareholders in both the short and the long term. Nick CoshGroup chairman5 September 2007 Group chief executive officer's report Overview Profit after tax for the six months to 30 June 2007 stands at £17.2 million,which is 5% up on the same figure for 2006 (£16.3 million) equating to earningsper share of 5.89p (2006: 5.59p) and annualised return on equity of 14% (2006:15%). In the first half of the year the company bore one-off expenses in theorder of £4 million for the relocation of its headquarters to Bermuda. Theweakness of the US dollar, together with volatile bond yields in the first halfof the year, has also affected these results; for example gross written premiumand net earned premium respectively are £18 million and £10 million less thanthey would have been at stable exchange rates. In addition, the 2006 interimprofit benefited from a further £3.1 million of extra income as a result of theKiln pension scheme enhanced transfer exercise. If we exclude these one-offitems and the foreign exchange effect on non-monetary items, our profit aftertax for the first half of 2007 would have been £20.8 million, a 23% increase on2006 (£17.0 million). In this context the results are highly satisfactory andaugur well for the balance of the year. Gross written premium of £241.3 million for the half year is 4.5% up on 2006,although this is less than we originally forecast in our business plans. Asgreater competition emerged in the first half of the year, we withdrew from somebusiness as we sought to maintain our disciplined underwriting stance, writingfor profit rather than volume. As a result, the overall pricing of our bookdeclined by less than 2% in the period. Efficient management of capital remains central to our intention to producesuperior returns for our shareholders. Since the year-end we have receivedsignificant levels of cash from Lloyd's, released from successful underwritingyears. This has helped us to increase our cross-cycle minimum dividend to 5p pershare from 4p. Our increased capital base will also be used to support ourstrategic aims; we continue to look to acquire capacity on our flagshipSyndicate 510 where we can do so on acceptable terms, and to take initiatives toexpand our international distribution and establish a US business which webelieve will enhance shareholder value in the medium term. In the event thatthese strategic initiatives require less funding than we currently envisage, andnotwithstanding our enhanced dividend policy, we will keep under review alloptions for returning further capital to our shareholders over time. Underwriting environment While there has been considerable comment in the market about falling rates andthe arrival of the soft market, rates in the first half of 2007 for Kiln'sflagship Syndicate 510 actually remained only marginally below 2006 levels, at98.4% of last year's rates, although rates in some areas of the property andreinsurance books have indeed been below the levels we had expected. As is shownin the table below, overall rates to 15 August 2007 remain 16% ahead of those of2002, which was itself a good year. Our continuing commitment to underwriting discipline at Kiln means that we donot simply follow market pricing when it begins to turn down. We adhere to theprinciple of pursuing underwriting profit, which will inevitably have an impacton premium volume at some stages during the insurance cycle. If we do notbelieve that a piece of business offers sufficient opportunity to generateadequate returns on capital for shareholders, we will choose not to accept theassociated risk. To date this year, not all pricing across our insuranceportfolio has reached or maintained the levels that we expected. We activelymanage our exposure to pricing fluctuations and expand and contract ourportfolio of business accordingly. We expect full year premiums for 2007 to showa small increase on the 2006 equivalent. Although this is somewhat below ourinitial expectations, we strongly believe that our shareholders' interests arebest served by maintaining our underwriting discipline, writing for profitrather than volume. The table below shows current pricing levels still significantly ahead of thosein 2002: Kiln Premium Rating Index for Syndicate 510with 2002 as base year -------------------------------------------------------------------------------- 2002 2003 2004 2005 2006 2007* % % % % % %Accident & Health 100 107 112 112 112 111Property 100 105 103 101 114 112Reinsurance 100 102 100 100 134 138Marine 100 107 102 105 131 127Aviation 100 102 100 99 96 88Syndicate 510 total 100 105 102 102 118 116-------------------------------------------------------------------------------- *Premium Rating Index to 15 August 2007 In terms of loss experience to date, 2007 has developed in a similar fashion to2006, with attritional and large loss activity being broadly in line withexpectations. European storm Kyrill and Hurricane Dean passed through withrelatively little insured losses to Kiln. The UK floods have affected us and weexpect their impact to be around £5 million in total for the June and Julyincidents combined. Operational update Ensuring that we transact business effectively and efficiently - in terms ofboth time and money - remains an area of focus for Kiln, particularly in respectof our Lloyd's operations. Wherever we do business, we will thrive only if weare able to deliver superior underwriting returns and remain cost competitive.Lloyd's continues to drive for improvements in process efficiency and we supportthem in this; at Kiln we continue to invest in improving our infrastructure andsystems in order to meet the challenges of electronic trading and those ofmanaging an international operation. Our operating expenses have risen asenvisaged as we make these investments for the future. The future 2007 is a transitional year for Kiln. The Group is developing from being atraditional London-based insurer reliant almost exclusively on Lloyd's for itsbusiness to a new phase in its evolution as an international insurance andreinsurance group with a presence in a range of markets around the world. Wehave restructured Kiln to reflect the new organisation with its headquarters inBermuda and operating subsidiaries in London, Hong Kong, Belgium, South Africaand Singapore. The move to Bermuda, which was completed in May of this year, wasan important step in this international development and Kiln is now betterpositioned to pursue its strategic objectives and to react more quickly to theever-changing dynamics of the insurance and reinsurance markets. We now have a Group management team - comprising the executive directors of KilnLtd and a number of other managers based in London and Bermuda - in addition tosubsidiary operating management structures in our various geographical centres.This includes R J Kiln & Co Limited, the operating company that manages the foursyndicates at Lloyd's, which now has its own management team led by CharlesFranks. This new structure allows the Kiln Ltd executive directors toconcentrate on the strategy and direction of the group and ensures that eachoperating company has the dedicated attention of its own management team. With our new headquarters in Bermuda and an invigorated management structure inplace, the coming year is one in which the restructured Kiln will move to takefull advantage of these changes. We continue to investigate opportunities forestablishing a presence in the USA, which is made easier through theestablishment of our Bermudian base. It is vital that we identify the correctvehicle for the purpose, so this ambition will be realised only if and whenthere is an alignment of the appropriate conditions and opportunities. Our planto expand our global distribution network remains central to our futuredevelopment. As well as the new offices that we have opened recently in HongKong, Singapore and Belgium, we have made investments in other markets, such asDenmark and Cyprus, and we continue to seek out other opportunities to improveour access to a range of overseas markets for Kiln's specialist insuranceproducts, complementing London as our primary market. The ability to attract andmanage third party capital wishing to participate in the Kiln insuranceportfolio remains important to Kiln. Both inside and outside Lloyd's, it givesgreater presence within Kiln's specialist markets as well as generating improvedrisk adjusted returns for our shareholders, and it is a central component ofKiln's strategy. Nevertheless, we will continue to pursue our intention ofincreasing the proportion of Syndicate 510's underwriting capacity that we own,as long as we can do so at a price that is warranted and which deliverslong-term value for shareholders. Our decision to reduce our overall capacity at Lloyd's by 14% to £847 millionfor 2008 reflects our policy of underwriting for profit rather than volume;rates are reducing in some sections of the market in which we specialise and itis our intention to exercise strong discipline with regard to the delivery ofsatisfactory levels of risk adjusted returns on the capital we manage. Thismeans we must be prepared to walk away from business if it is not in theinterests of our shareholders and other capital providers to accept it. It isduring the hard market, however, that a company such as Kiln prepares for apossible future deterioration in underwriting conditions. We do this by focusingon the development of longer term business that will form the core of ourportfolio through the downturn; such business is built on the relationships onwhich we set great store as a company. The quality of Kiln's underwritingportfolio, the strength in depth of our underwriting team and the investments wehave made over the past few months give us confidence that we will be able tocontinue to produce robust returns for our shareholders. Edward CreasyGroup chief executive officer5 September 2007 Consolidated income statementfor the six months ended 30 June 2007 Year to Six months to Six months to 31 December 30 June 2007 30 June 2006 2006 (unaudited) (unaudited) (audited) Note £'000 £'000 £'000--------------------------------------------------------------------------------------------------Gross written premiums 241,264 230,815 429,146 --------------------------------------------- Net written premiums 143,076 148,509 291,431Change in the provision for unearned premiums (14,091) (27,264) (19,153) ---------------------------------------------Net insurance premium revenue 128,985 121,245 272,278Net insurance claims incurred (65,832) (62,143) (116,810)Investment income from underwriting assets 4 4,347 4,500 13,153Net operating expenses 6 (45,834) (42,339) (97,390) ---------------------------------------------Profit from underwriting operations 21,666 21,263 71,231 --------------------------------------------- Investment income from non-underwriting assets 4 6,680 4,194 9,488Fees and commission income 11,975 9,838 22,505Other income 5 258 3,134 3,210Finance costs (2,022) (694) (1,671)Corporate and administrative expenses 6 (16,951) (11,023) (33,319)Foreign exchange losses 8 (945) (2,738) (8,384)Share of operating results after tax ofassociated companies 116 353 1,085 --------------------------------------------- Profit on ordinary activities before taxation 20,777 24,327 64,145Income tax expense 9 (3,586) (8,028) (20,533) ---------------------------------------------Profit after tax attributable to the equityshareholders 17,191 16,299 43,612 --------------------------------------------- Earnings per ordinary shareBasic 10 5.89p 5.59p 14.97pDiluted 10 5.89p 5.59p 14.96p All earnings are from continuing operations. Subsequent to 30 June 2007, the directors proposed an interim dividend for 2007of 1.33p (interim 2006: 1.0p) per ordinary share, £3,883,026 (interim 2006:£2,913,783). This will be accounted for as an appropriation of retained earningsin the full year ending 31 December 2007. Consolidated statement of recognised income and expenseFor the six months ended 30 June 2007 Year to Six months to Six months to 31 December 30 June 2007 30 June 2006 2006 (unaudited) (unaudited) (audited) £'000 £'000 £'000--------------------------------------------------------------------------------------------------Actuarial gains / (losses) on pension scheme 110 435 (307)Tax on items taken to equity (33) (130) 92Exchange differences on retranslation offoreign operations (127) - (9) ---------------------------------------------Net income / (expense) recognised directly in equity (50) 305 (224)Profit for the period 17,191 16,299 43,612 ---------------------------------------------Total recognised income for the period 17,141 16,604 43,388-------------------------------------------------------------------------------------------------- Consolidated balance sheetAs at 30 June 2007 30 June 2007 30 June 2006 31 December (unaudited) (unaudited) 2006 (audited) Note £'000 £'000 £'000-------------------------------------------------------------------------------------------------AssetsProperty, plant and equipment 1,233 395 1,181Intangible assets 29,461 21,008 29,197Deferred acquisition costs 64,094 59,753 50,620Investments in associated undertakings 12,729 11,698 12,638Deferred tax asset 5,563 1,791 12,419Retirement benefit obligation reimbursement right 1,200 1,170 1,710Reinsurance assets 179,800 222,600 152,116Prepayments and accrued income 6,751 5,002 10,102Financial investments 11 270,058 317,512 263,352Insurance receivables 202,930 244,251 210,614Other assets 35,023 25,193 23,092Cash and cash equivalents 231,158 154,504 242,643 --------------------------------------------Total assets 1,040,000 1,064,877 1,009,684 -------------------------------------------- Capital and reservesCalled up share capital 2,920 2,914 2,914Share premium 252,489 165,773 165,773Retained earnings 4,046 34,256 79,615Other reserves 82 23,582 2,140 --------------------------------------------Total capital and reserves 14 259,537 226,525 250,442 -------------------------------------------- LiabilitiesRetirement benefit obligation 16 2,805 2,503 3,658Deferred tax liabilities 13,310 720 10,498Insurance contract liabilities 531,840 590,420 491,008Current taxes 3,963 4,326 11,318Insurance payables 175,907 217,752 180,525Other liabilities 20,883 22,138 29,450Interest bearing loans and borrowings 31,755 493 32,785 --------------------------------------------Total liabilities 780,463 838,352 759,242 --------------------------------------------Total equity and liabilities 1,040,000 1,064,877 1,009,684 -------------------------------------------- Consolidated cash flow statementFor the six months ended 30 June 2007 Six months to Six months to Year to 30 June 2007 30 June 2006 31 December 2006 (unaudited) (unaudited) (audited) Note £'000 £'000 £'000------------------------------------------------------------------------------------------------------------------------ Net cash outflows from operating activities 17 (9,420) (65,825) (8,885) ---------------------------------------------------Investing activitiesPurchase of intangible assets (1,580) (1,768) (6,286)Purchase of property, plant and equipment (392) (79) (303)Interest and dividends received 11,067 11,136 23,210Acquisition of subsidiaries (676) - (3,969)Investment in associate (26) - (209) ---------------------------------------------------Net cash inflows from investing activities 8,393 9,289 12,443 ---------------------------------------------------Financing activitiesFees on banking facilities (1,612) (363) (1,054)Expenses incurred in rights issue - (1,025) (1,025)Dividends paid to shareholders (8,759) (5,828) (8,741)Proceeds from borrowings - - 34,649 ---------------------------------------------------Net cash (outflows) / inflows from financing activities (10,371) (7,216) 23,829 --------------------------------------------------- Net (decrease) / increase in cash and cash equivalents (11,398) (63,752) 27,387Effect of exchange rate changes on cash and cash equivalents 195 (2,774) (5,563)Cash and cash equivalents at beginning of period 242,361 220,537 220,537 ---------------------------------------------------Net cash and cash equivalents at end of period 231,158 154,011 242,361 --------------------------------------------------- 1. Accounting policies 1.1 Group and its operations Kiln Ltd was incorporated on 2 January 2007 in Bermuda as a limited liabilitycompany under registered number 39424. On 13 March 2007, the former ultimate holding company of the Kiln Group, Kilnplc (subsequently re-registered as Kiln (UK) Holdings Limited) announcedproposals for the establishment of a Bermudian holding company for the Group. Following approval by the shareholders of Kiln plc, the approval by the HighCourt of Justice of England and Wales of a scheme of arrangement under section425 of the UK Companies Act 1985 (the 'Scheme') and the Scheme becomingeffective on 21 May 2007, the company acquired Kiln plc and became the newholding company of the Group. All ordinary shares of 1p issued by Kiln plc werereplaced by new common shares of 1p issued by the company, on the basis of onenew common share for every ordinary share of 1p each in Kiln plc which wassubsequently cancelled. The company's common shares were admitted to trading on the London StockExchange on 29 May 2007. On the basis that the transaction was effected by creating a new parent that isnot itself a business, the transaction is considered to be outside the scope ofIFRS 3. It has therefore been accounted for using the pooling of interestsmethod. The result of this is that the consolidated financial statements of KilnLtd will be the same as those previously presented by Kiln plc, except for theshare capital being that of Kiln Ltd. There is no requirement to restate theprior period comparatives. The Group continues to present its consolidated financial statements in poundssterling which is the functional currency of the parent. The interim condensed consolidated financial statements of Kiln Ltd for the sixmonths ended 30 June 2007 were authorised for issue in accordance with aresolution of the directors on 4 September 2007. The principal activities of the Group consist of the underwriting of insuranceand reinsurance business together with associated activities. 1.2 Basis of preparation and accounting policies Basis of preparation The interim condensed consolidated financial statements have been prepared usingaccounting policies that are in accordance with International FinancialReporting Standards (IFRS) as they apply to the financial statements of theGroup for the six months ended 30 June 2007 applied in accordance with theprovisions of the Bermuda Companies Act 1981. The interim condensed consolidated financial statements do not include all theinformation and disclosures required in the annual financial statements, andshould be read in conjunction with the Group's annual financial statements as at31 December 2006. The financial information for the year ended 31 December 2006 in this interimreport does not constitute statutory accounts for the period. Statutoryaccounts for Kiln plc for the year ended 31 December 2006 have been delivered tothe UK Registrar of Companies. The auditors have reported on those accounts;their report was unqualified. Significant accounting policies The accounting policies adopted in the preparation of the interim condensedconsolidated financial statements are consistent with those followed in thepreparation of the Group's annual financial statements for the year ended 31December 2006. Basis of consolidation The interim condensed consolidated financial statements incorporate thefinancial statements of the company, and entities controlled by the company (itssubsidiaries), for the six months ended 30 June 2007. Certain subsidiaryundertakings underwrite as corporate members of Lloyd's on syndicates managed bythe Group. The Group's share of the transactions, assets and liabilitiesrelating to syndicate participation is included in the consolidated financialstatements. Inter-company transactions and balances between Group companies are eliminated. 2. Segmental analysis Basis of segmentation The primary segmental analysis of the Group's income statement is reported usingthe divisional structure of the Group as this is how performance is monitored bymanagement. Profits or losses arising from underwriting operations exclude theeffects of movements in exchange rates and which are noted separately; foreignexchange exposures are managed centrally by the Group, not by the underwriters. Consolidated income statement by business segments Technical resultSix months ended 30 June 2007 Marine Aviation Life, Accident & Reinsurance Property Total Health underwriting £'000 £'000 £'000 £'000 £'000 £'000------------------------------------------------------------------------------------------------------------------------Gross written premiums 43,506 10,700 25,156 42,400 119,502 241,264------------------------------------------------------------------------------------------------------------------------Net written premiums 27,663 7,147 14,093 17,677 76,496 143,076Change in the provision for unearnedpremiums (4,511) 1,228 (260) (7,284) (3,264) (14,091)------------------------------------------------------------------------------------------------------------------------ Net insurance premium revenue 23,152 8,375 13,833 10,393 73,232 128,985 Net insurance claims incurred (10,885) (3,933) (5,768) (5,434) (39,812) (65,832)Net operating expenses (7,903) (2,799) (6,463) (2,912) (25,757) (45,834)------------------------------------------------------------------------------------------------------------------------Technical result from underwritingoperations excluding investmentincome 4,364 1,643 1,602 2,047 7,663 17,319------------------------------------------------------------------------------------------------------------------------All net insurance premium revenue has arisen from external customers. Profit & loss period ended 30 June 2007 Total Kiln Managing Associated Kiln Eliminations Group underwriting Re agency undertakings Ltd £'000 £'000 £'000 £'000 £'000 £'000 £'000 ----------------------------------------------------------------------- Technical result from underwriting 6,619 7,255 - - - 3,445 17,319operations excluding investment incomeInvestment income from underwriting assets 4,347 - - - - 4,347 -----------------------------------------------------------------------Profit from underwriting operations 10,966 7,255 - - - 3,445 21,666Investment income from non underwriting ASSETS 4,852 623 870 273 3,689 (3,627) 6,680Fees and commission income 873 - 14,089 801 (3,788) 11,975Other income 245 - 28 - (15) 258Finance costs (3,274) - (336) - (1,801) 3,389 (2,022)Corporate and administrative expenses (1,143) (230) (8,272) - (7,306) - (16,951)Foreign exchange gains / (losses) (687) (884) 2 - 624 - (945)Share of operating results of associated companies - - - 120 (4) - 116 -----------------------------------------------------------------------Profit on ordinary activities before taxation 11,832 6,764 6,381 393 (3,997) (596) 20,777Income tax expense (2,114) - (1,798) (118) 335 109 (3,586) -----------------------------------------------------------------------Profit after tax attributable to the equity shareholders 9,718 6,764 4,583 275 (3,662) (487) 17,191 ----------------------------------------------------------------------- Consolidated income statement by business segments Technical resultSix months ended 30 June 2006 Marine Aviation Life, Accident Reinsurance Property Total & Health underwriting £'000 £'000 £'000 £'000 £'000 £'000 ---------------------------------------------------------------------------- Gross written premiums 39,422 12,877 17,539 44,230 116,747 230,815 ----------------------------------------------------------------------------Net written premiums 30,974 9,510 10,203 18,156 79,666 148,509Change in the provision for unearnedpremiums (9,319) (430) 2,825 (7,450) (12,890) (27,264) ----------------------------------------------------------------------------Net insurance premium revenue 21,655 9,080 13,028 10,706 66,776 121,245Net insurance claims incurred (12,190) (3,070) (5,040) (5,629) (36,214) (62,143)Net operating expenses (7,061) (2,293) (5,725) (2,372) (24,888) (42,339) ----------------------------------------------------------------------------Technical result from underwritingoperations excluding investment income 2,404 3,717 2,263 2,705 5,674 16,763 ---------------------------------------------------------------------------- All net insurance premium revenue has arisen from external customers. Profit & loss period ended 30 June 2006 Total Managing Associated Kiln Eliminations Group underwriting agency undertakings Ltd £'000 £'000 £'000 £'000 £'000 £'000 ------------------------------------------------------------------------ Technical result from underwriting operations excluding investment income 15,076 - - - 1,687 16,763Investment income from underwriting assets 4,500 - - - - 4,500 ------------------------------------------------------------------------Profit from underwriting operations 19,576 - - - 1,687 21,263 Investment income from non underwriting assets 2,697 542 273 2,618 (1,936) 4,194Fees and commission income 31 11,996 - - (2,189) 9,838Other income - 1,215 - 36 1,883 3,134Finance costs (1,935) (287) - (365) 1,893 (694)Corporate and administrative expenses (456) (9,054) - (1,513) - (11,023)Foreign exchange gains / (losses) (3,497) (5) - 764 - (2,738)Share of operating results of associatedcompanies - - 353 - - 353 ------------------------------------------------------------------------Profit on ordinary activities before taxation 16,416 4,407 626 1,540 1,338 24,327Income tax expense (5,699) (1,384) (82) (462) (401) (8,028) ------------------------------------------------------------------------Profit after tax attributable to the equity shareholders 10,717 3,023 544 1,078 937 16,299 ------------------------------------------------------------------------ Currency split The settlement currency for gross premiums written by the Kiln syndicates issplit approximately as follows: 2007 2006US dollars 65% 62% GB pounds 30% 33%Canadian dollars 5% 5% 3. 100% operating results of managed syndicates The Group operating result is derived from its participation in the syndicatesmanaged. The table below sets out the 100% underwriting operating results ofthese syndicates on an annual accounting basis. Six months to Six months to Year to 30 June 2007 30 June 2006 31 December 2006 (unaudited) (unaudited) (audited) £'000 £'000 £'000-------------------------------------------------------------------------------------------------------- Gross written premiums 486,261 512,181 946,113-------------------------------------------------------------------------------------------------------- Net written premiums 369,946 385,863 763,575Change in the provision for unearned (43,013) (64,037) (31,075)premiums:Earned premiums, net of reinsurance 326,933 321,826 732,500--------------------------------------------------------------------------------------------------------Investment return from underwriting assets 10,468 12,032 32,970--------------------------------------------------------------------------------------------------------Claims incurred net of reinsurance (157,162) (159,009) (299,209)--------------------------------------------------------------------------------------------------------Net acquisition costs (89,769) (89,008) (205,801)Operating expenses (31,242) (27,400) (54,652)Net operating expenses (121,011) (116,408) (260,453)--------------------------------------------------------------------------------------------------------Profit from underwriting operations 59,228 58,441 205,808--------------------------------------------------------------------------------------------------------Claims ratio 48% 49% 41%Acquisition cost ratio 28% 28% 28%Operating expense ratio 9% 9% 7%Combined ratio 85% 86% 76%-------------------------------------------------------------------------------------------------------- The recognition of syndicate personal expenses and underwriters' profitcommission included within operating expenses has been aligned to the Group'saccounting policy. The operating expense ratio previously recognised these itemson a cash basis and reported 12% at 30 June 2006 and 8% at 31 December 2006. Definitions Net earned premium Earned premium net of outwards reinsurance but gross of all policy acquisition costs Claims ratio Net incurred claims as a percentage of net earned premium Acquisition cost ratio Net acquisition costs as a percentage of net earned premium Operating expense ratio Operating expenses as a percentage of net earned premium Combined ratio Claims ratio plus expense and acquisition cost ratios 4. Investment income Six months Six months Year to to 30 June 2007 to 30 June 2006 31 December 2006 (unaudited) (unaudited) (audited) £'000 £'000 £'000-------------------------------------------------------------------------------------------------------- Interest on investments and cash 4,843 5,925 12,898Net fair value (losses) / gains on (496) (1,425) 255underwriting investments -----------------------------------------------------Investment income from underwriting assets 4,347 4,500 13,153 ----------------------------------------------------- Interest on investments and cash 6,127 4,875 9,834Interest on loan notes issued by an associate 273 273 551Dividends on unlisted investments 11 - 571Net fair value gains / (losses) on 269 (954) (1,468)non-underwriting investments -----------------------------------------------------Investment income from non-underwriting assets 6,680 4,194 9,488 ----------------------------------------------------- -----------------------------------------------------Total investment income 11,027 8,694 22,641 ----------------------------------------------------- An analysis of the investment income by investment type is shown below: Rate of return (annualised) Six months Six months Year Six months Six months Year to to 30 June to 30 June to 31 December 2006 to 30 June to 30 June 31 December 2006 2007 2006 2007 2006 (unaudited) (unaudited) (audited) (unaudited) (unaudited) (audited) % % % £'000 £'000 £'000--------------------------------------------------------------------------------------------------------------------- Syndicate investments 4.0 3.0 4.4 4,347 4,500 13,153 Funds at Lloyd'sFixed interest andcash 5.0 3.4 5.0 3,840 1,500 5,306 Corporate investments 6.0 4.0 4.6 2,840 2,694 4,182--------------------------------------------------------------------------------------------------------------------- Total investment income 4.8 3.2 4.4 11,027 8,694 22,641--------------------------------------------------------------------------------------------------------------------- Returns from corporate investments include income, gains and losses fromunlisted investments and loan notes issued by associated companies. Funds atLloyd's is the capital required by Lloyd's to support the amount of insurancebusiness a member can underwrite. 5. Other income Six months to Six months to Year to 30 June 2007 30 June 2006 31 December 2006 (unaudited) (unaudited) (audited) £'000 £'000 £'000----------------------------------------------------------------------------------------------------------------- Gain on enhanced pension transfer value initiatives - 3,061 3,125Other 258 73 85 -----------------------------------------------Total other income 258 3,134 3,210 ----------------------------------------------- 6. Operating and administrative expenses Six months to Six months to Year to 30 June 2007 30 June 2006 31 December 2006 (unaudited) (unaudited) (audited) £'000 £'000 £'000---------------------------------------------------------------------------------------------------------------- Net operating expenses 45,834 42,339 97,390Corporate and administrative expenses 16,951 11,023 33,319 ---------------------------------------------------Total expenses 62,785 53,362 130,709 --------------------------------------------------- Six months to Six months to Year to 30 June 2007 30 June 2006 31 December 2006 (unaudited) (unaudited) (audited) £'000 £'000 £'000---------------------------------------------------------------------------------------------------------------- Acquisition costs 56,420 52,487 101,268Movement in deferred acquisition costs (13,131) (12,455) (7,405)Expenses recovered from quota share reinsurers (9,133) (7,096) (17,372)Staff costs 10,014 7,058 20,140Profit related bonus element 306 1,468 9,130Profit commission 242 2 138Auditor's remuneration 747 585 1,158Depreciation charge 345 403 430Amortisation charge 1,416 1,005 2,528Other administrative expenses 11,526 9,905 19,695Redomiciliation costs 4,033 - 999 ---------------------------------------------------Total expenses 62,785 53,362 130,709 --------------------------------------------------- Six months to Six months to Year to 30 June 2007 30 June 2006 31 December 2006 (unaudited) (unaudited) (audited) £'000 £'000 £'000----------------------------------------------------------------------------------------------------------------- Redomiciliation costs 4,033 - 999Overseas subsidiaries 1,849 411 1,145Other corporate and administrative expenses 11,069 10,612 31,175 ---------------------------------------------------Corporate and administrative expenses 16,951 11,023 33,319 --------------------------------------------------- 7. Performance Related Remuneration (PRR) PRR comprises 1) 6.2% of total remuneration excluding PRR, 2) an element ofprofit commission received and 3) a Profit Related Bonus Element (PRBE). Thethird element (PRBE) of the PRR pool is calculated as 20% of Kiln Group's profitbefore tax in excess of 10% of opening shareholders' equity. The PRR isrecognised in the accounts over the employment period to vesting, with the firstinstalment charged in the current financial year. The amount charged for the three elements described above in these financialstatements is £818,863 (2006: £365,000). This comprises two components being thecontingent liability brought forward now chargeable plus the element of the 2007financial year's PRR computed as described above and chargeable to the currentperiod, less any amounts related to leavers and not now payable. As at the balance sheet date the contingent liability is £4,758,330 (2006:£2,816,000). For the purposes of PRBE, profit before tax is adjusted to exclude non-recurringincome and the foreign exchange impact of non-monetary items. Employee Co-Investment Plan (COIP) If invited by the remuneration committee, selected staff can elect to allocatean element of their PRR to a matching share option scheme. Options over ordinaryshares in Kiln Ltd (previously Kiln plc) can be taken to a maximum of 10% of theoverall PRR award for each financial year. An offer in respect of the 2006financial year was made in March 2007 of £507,640 (2005 financial year offer:£154,271). The charge will be recognised over the five year vesting period ofthe options. The amount charged in this period is £81,618 (2006: £15,427). 8. Foreign exchange losses Six months to Six months to Year to 30 June 2007 30 June 2006 31 December 2006 (unaudited) (unaudited) (audited) £'000 £'000 £'000----------------------------------------------------------------------------------------------------------------------- Net (losses) / gains on settlement of foreigncurrency transactions (302) 1,135 1,135Realised loss on US prior year tax refund (1,325) - -Revaluation of closing balance sheet (765) 232 (2,306)Non-monetary item adjustment - unearned premiumreserve and deferred acquisition costs 1,447 (4,105) (7,213) -------------------------------------------------------Total foreign exchange losses (945) (2,738) (8,384) ------------------------------------------------------- Exchange Rates 30 June 30 June 31 December 2007 2006 2006----------------------------------------------------------------------------------- AverageUS dollar 1.97 1.80 1.84Canadian dollar 2.24 2.03 2.09 ClosingUS dollar 2.01 1.85 1.96Canadian dollar 2.13 2.06 2.28 9. Income tax expense Current year tax charge Six months to Six months to Year to 30 June 2007 30 June 2006 31 December 2006 (unaudited) (unaudited) (audited) £'000 £'000 £'000---------------------------------------------------------------------------------------------------------------- Current TaxUK corporation tax on profits of the period 1,164 8,350 18,608Foreign tax 68 - -Adjustments in respect of prior periods (1,696) 2,181 (407) ---------------------------------------------------Total current tax (464) 10,531 18,201 --------------------------------------------------- Deferred TaxOrigination / (reversal) of temporary differences 4,310 (2,503) 2,332 ---------------------------------------------------Effect of reduction of UK corporation tax rate from30% to 28% in 2008 (260) - - Total deferred tax 4,050 (2,503) 2,332 Income tax expense reported in consolidated incomestatement 3,586 8,028 20,533 --------------------------------------------------- Six months to Six months to Year to 30 June 2007 30 June 2006 31 December 2006 (unaudited) (unaudited) (audited) £'000 £'000 £'000 ---------------------------------------------------Deferred TaxIncome tax expense reported in consolidatedstatement of recognised income and expense (33) (130) 92 --------------------------------------------------- Unrecognised tax losses The Group has an unrecognised deferred tax asset of £2,033,422 (2006:£2,033,422) arising as a result of capital losses of £6,778,073 (2006:£6,778,073). This can only be offset against future capital gains and has notbeen recognised in these financial statements. The loss has no expiry date. 10. Basic and diluted earnings per shareBasic earnings per ordinary share has been calculated by dividing the profitafter taxation of £17,191,000 by 291,956,851, the weighted average number ofordinary shares in issue throughout the period. The dilutive effect of shareoptions represents 83,466 shares and therefore the diluted earnings per sharehas been calculated by dividing the profit after taxation by 292,040,317 shares. Six months to Six months to Year to 30 June 2007 30 June 2006 31 December 2006 (unaudited) (unaudited) (audited) £'000 £'000 £'000 ----------------------------------------------------------Profit after tax attributable to ordinary equity holdersof Kiln Ltd (basic and diluted EPS profit) 17,191 16,299 43,612 ---------------------------------------------------------- ----------------------------------------------------------Reconciliation of denominators used in calculating basicand diluted earnings per share No. No. No. ---------------------------------------------------------- Weighted average number of ordinary shares - basicearnings per share 291,956,851 291,378,328 291,378,328 Weighted average number of share issue - Belmarine - - 38,040 ----------------------------------------------------------Weighted average number of ordinary shares - basic 291,956,851 291,378,328 291,416,368Dilutive effect of share options 83,466 36,741 40,299 ----------------------------------------------------------Weighted average number of ordinary shares - diluted 292,040,317 291,415,069 291,456,667 ---------------------------------------------------------- Basic 5.89p 5.59p 14.97pDiluted 5.89p 5.59p 14.96p As a result of applying the pooling of interests method and the one-for-onenature of the share exchange, there has been no requirement to adjustcomparatives. 11. Financial investments 30 June 2007 30 June 2006 31 December (unaudited) (unaudited) 2006 (audited) £'000 £'000 £'000------------------------------------------------------------------------------------ At fair valueEquity securities: Unlisted 1,615 1,442 1,222Debt securities: Government securities 171,538 211,647 187,465 Listed debt securities 70,218 71,199 48,418 Certificates of deposit 19,487 26,024 19,047 ------------------------------------------Total financial investments at fairvalue through the income statement 262,858 310,312 256,152 ------------------------------------------At costLoan note 7,200 7,200 7,200 ------------------------------------------Total financial investments 270,058 317,512 263,352 ------------------------------------------ All listed investments are recognised securities on exchanges around the world.All investments valued at cost approximate to fair value. Financial investments include corporate investments held by Group companies andthe Group's share of syndicate assets. The corporate investments can be furtheranalysed between Funds at Lloyd's and other investments. SyndicateAs at 30 June 2007 Total Corporate investments investments Funds at Other Lloyd's £'000 £'000 £'000 £'000 -------------------------------------------------------------------------------------------------------------------- Debt securities and other fixed income securities 77,418 35,233 7,200 34,985Government securities 171,538 18,635 - 152,903Unlisted investments 21,102 19,487 1,615 - -------------------------------------------------------Fair value at 30 June 2007 270,058 73,355 8,815 187,888 ------------------------------------------------------- As at 30 June 2006 Total Corporate investments Syndicate Funds at Other investments Lloyd's £'000 £'000 £'000 £'000------------------------------------------------------------------------------------------------------------------- Debt securities and other fixed income securities 78,398 34,464 7,200 36,734Government securities 211,648 59,049 - 152,599Unlisted investments 27,466 26,024 1,442 - -------------------------------------------------------Fair value at 30 June 2006 317,512 119,537 8,642 189,333 ------------------------------------------------------- As at 31 December 2006 Total Corporate investments Syndicate Funds at Other investments Lloyd's £'000 £'000 £'000 £'000 --------------------------------------------------------------------------------------------------------------------- Debt securities and other fixed income securities 55,618 28,917 7,200 19,501Government securities 187,465 11,643 - 175,822Unlisted investments 20,269 19,047 1,222 - -------------------------------------------------------Fair value at 31 December 2006 263,352 59,607 8,422 195,323 ------------------------------------------------------- 12. Return on equity Year to Six months to Six months to 31 December 30 June 2007 30 June 2006 2006 (unaudited) (unaudited) (audited) £'000 £'000 £'000------------------------------------------------------------------------------------------- Profit after tax 17,191 16,299 43,612Opening shareholders' equity 250,442 215,758 215,758Annualised return on opening equity 14% 15% 20% Return on equity is calculated as the profit on ordinary activities after taxattributable to equity shareholders divided by opening shareholders' equity. 13. Share capital 30 June 2007 On inception* Number of shares Share capital Number of shares Share capital £'000 £'000----------------------------------------------------------------------------------------------------------------------- Issued share capital 291,956,851 4,000 700,000 7 * Kiln Ltd was incorporated on 2 January 2007. The number of shares reported is for Kiln Ltd, the legal parent of the KilnGroup. Number of ordinary shares in issue Number of 1p ordinary shares in issue---------------------------------------------------------------------------------------------------As at 31 December 2006 -Issue of ordinary shares on incorporation 700,000Redemption of ordinary shares issued on incorporation (700,000)Issue of ordinary shares on scheme of arrangement 291,956,851As at 30 June 2007 291,956,851 All issued shares are fully paid. Kiln Ltd was incorporated on 2 January 2007 with authorised and issued sharecapital of £7,000 comprising 700,000 ordinary shares of 1p each. On 12 March2007 the authorised capital was increased to £4,000,000 comprising 400,000,000ordinary shares of 1p each. 291,956,851 shares were issued at fair value underthe scheme of arrangement on 21 May 2007. Shares originally issued on incorporation were redeemed at the par value atwhich they had been issued. 14. Total Group reserves Other reserves Ordinary Share Capital Merger Other Retained Total share premium redemption reserve reserves earnings capital account reserve £'000 £'000 £'000 £'000 £'000 £'000 £'000----------------------------------------------------------------------------------------------------------------------- As at 1 January 2006 2,914 165,782 270 1,824 21,488 23,480 215,758 Total recognised income andexpense for the period - - - - - 16,604 16,604Dividends - - - - - (5,828) (5,828)Rights issue expenses - (9) - - - - (9) --------------------------------------------------------------------------------------------- As at 30 June 2006 2,914 165,773 270 1,824 21,488 34,256 226,525Transfer to retained earnings - - - - (21,488) 21,488 -Share options Co-Investment plan - - - - 46 - 46Total recognised income andexpense for the period - - - - - 26,784 26,784 Dividends - - - - - (2,913) (2,913) ----------------------------------------------------------------------------------------------As at 31 December 2006 2,914 165,773 270 1,824 46 79,615 250,442 Share issue - Belmarineacquisition 6 625 - - - - 631 Dividends - - - - - (8,759) (8,759)Group reorganisation (2,920) (166,398) (270) (1,824) (46) 171,458 -Establish Kiln Ltd 2,920 346,698 - (94,209) - (255,409) -Transfer merger reserve - (94,209) - 94,209 - - -Share options Co-Investment Plan - - - - 82 - 82Total recognised income andexpense for the period - - - - - 17,141 17,141 ---------------------------------------------------------------------------------------------- As at 30 June 2007 2,920 252,489 - - 82 4,046 259,537 ---------------------------------------------------------------------------------------------- 15. Dividends Amounts recognised as distributions to equity shareholders in the period: Six months to 30 Six months to Year to June 2007 30 June 2006 31 December 2006 (unaudited) (unaudited) (audited) £'000 £'000 £'000---------------------------------------------------------------------------------------------------------------------- Final dividend for the year ended 31 December 2005 of 2p - 5,828 5,828Interim dividend for the year ended 31 December 2006 of 1p - - 2,913Final dividend for the year ended 31 December 2006 of 3p 8,759 - ----------------------------------------------------------------------------------------------------------------------- 8,759 5,828 8,741---------------------------------------------------------------------------------------------------------------------- The interim dividend for the six months ended 30 June 2007 of 1.33p (£3,883,026)will be recognised in the 2007 year end financial statements. 16. Pension benefit obligation Summary of the Kiln Group pension scheme 30 June 2007 30 June 2006 31 December 2006 (unaudited) (unaudited) (audited) £'000 £'000 £'000 Fair value of assets 33,044 33,184 33,679Present value of obligations (35,849) (35,687) (37,337) --------------------------------------------------Gross deficit in the scheme (2,805) (2,503) (3,658) -------------------------------------------------- Of which allocated to syndicates 2,346 2,093 3,059 -------------------------------------------------- Kiln Group share of syndicate deficit (1,146) (923) (1,349)R J Kiln share of deficit (459) (410) (599) --------------------------------------------------Gross deficit attributable to the Kiln Group (1,605) (1,333) (1,948)Deferred tax credit 438 365 533 --------------------------------------------------Net deficit attributable to the Kiln Group (1,167) (968) (1,415)Pension Trust asset 2,871 1,106 1,829 --------------------------------------------------Balance 1,704 138 414 -------------------------------------------------- The positive balance equates to full coverage of the residual deficitattributable to the Kiln Group after the tax credit and under the currentactuarial assumptions. 17. Cash generated from operating activities 30 June 2007 30 June 2006 31 December 2006 (unaudited) (unaudited) (audited) £'000 £'000 £'000---------------------------------------------------------------------------------------------------------------- Net profit before taxation 20,777 24,327 64,145Adjustments for:Depreciation and amortisation charge including profit ondisposals 1,690 678 2,227Share of associated undertaking's result (116) (353) (1,085)Effect of exchange rate changes on cash and cash equivalents (195) 2,774 5,563Change in debtors (34,816) (35,376) 64,139Change in creditors 18,099 (1,330) (124,044)Net (purchases) / sales of investments (6,935) (39,696) 15,685Fair value losses 227 2,379 1,213Interest and dividends receivable (11,067) (11,136) (23,210)Interest payable 1,608 363 1,054Tax refunded / (paid) 1,308 (8,455) (14,572) -----------------------------------------------Net cash outflows from operating activities (9,420) (65,825) (8,885) ----------------------------------------------- This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Kin Group